The BAE Systems (LSE:BA.) share price is one of the biggest FTSE 100 gainers this year, and for good reason.

Results out this week show the UK defence giant is on track for a big uplift in annual profits. Countries continue to increase military orders with Russia’s war in Ukraine, and the recent conflict in Gaza.

The company manufactures fighter jets and submarines, among other large military equipment and machinery. It said it had logged £10bn of orders since the end of June 2023. That puts the group on track for more than £30bn in sales orders this year.

War footing

Last month I wrote how I picked up shares in Qinetiq Group. That’s one of the UK’s fastest-growing defence companies. Now I see potentially more value in its biggest rival.

And we’ve heard how the company’s business pipeline is booming. BAE Systems strategy director Steve Cardew told the market in August that global conflicts had spiked sales. Especially with the Russian invasion of Ukraine.

In July 2023 it signed a £280m weapons deal with the UK government. In September it boosted that supply with another £130m contract.

Shortly after, the US, UK and Australian governments announced they would spend £3.95bn on a new generation of submarines built by BAE Systems. These nuclear-powered subs are to back up a pact to counter China’s ambitions in the South Pacific.

That has led to BAE upgrading its guidance. Earnings per share will jump 10% to 12% in 2023, said chief exec Charles Woodburn.

24 years of dividend hikes

BAE shares come with a 25% higher price tag than at the turn of 2023. Quite the move for a £32bn company. And certainly for one of the world’s largest defence, aerospace and weapons manufacturers.

The thing that really gets me interested here is long-term value. When seeking compound growth — the eighth wonder of the world — consistency is key.

And BAE Systems has an incredible track record. Since this would be a long-term income stock for my SIPP, I like one specific fact. The company has improved its dividend per share every year since 1999.

Ignoring BAE Systems because it has repriced higher? That’s effectively saying I wouldn’t buy a company that is becoming more popular, and growing its revenue, profits and dividends.

What I’d pay

The downside, of course, of all this attention, is that shares are now trading at 16 times earnings — a healthy premium. But I see safety in numbers. Especially with the way the world is leaning these days.

If I’d have bought £10,000 worth of BAE shares in 2007 (£4.29 a share, 2331 shares), I’d have collected a modest 12.8p per share in dividends, worth £298.

That same £10,000 invested in 2022 would be worth £452.26 in dividends! Quite the uplift.

This, of course, doesn’t include the gain I’d have had from simply buying the stock 16 years ago and reinvesting dividends. By my calculations, if I’d have done that, my initial £10,000 of BAE shares would now be worth a tidy £50,403.67. So I can see the power of compounding, and time in the market.

I’ll leave the intraday trades and risky leveraged punts to others. I’ll stick to Britain’s best businesses for my long-term SIPP retirement stocks.

The post The BAE Systems share price is up on £30bn sales spike. Is it my next SIPP star? appeared first on The Twelfth Magpie.

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Tom Rodgers has positions in QinetiQ Group Plc. The Motley Fool UK has recommended BAE Systems and QinetiQ Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The BAE (LSE: BA) share price has been a rare bright spot on the FTSE 100 in 2022, climbing 50% year-to-date. It’s a sign of the times, sadly. The aerospace and defence contractor’s main business is selling weapons, and business is booming.

This isn’t a one-off due to war in Ukraine and tensions with China. BAE shares have been steadily climbing for years. I’ve been taking a few risks with my portfolio purchases lately, buying dirt-cheap dividend income stocks like housebuilder Persimmon and Lloyds Bank on low single-digit valuations. Should I balance this by purchasing a stock that is actually on the up?

The share price is rocketing

BAE shares trade at 17.27 times earnings and yield 2.99%. That looks attractive to me. I actually expected the valuation to be higher and yield lower, given recent share price success. 

One big attraction is that defence programmes tend to be long-term commitments, and purchases require ongoing support. BAE has a large backlog of work, and orders today will generate revenues for years or decades to come. The work keeps coming. New orders have topped £28bn this year. It’s hard to imagine that going into reverse in 2023, with the company reporting “robust” commitment to defence purchases among customers.

BAE’s revenues have been growing slowly and surely for years, ratcheting up from £17.22bn in 2017 to £18.52bn in 2021. Profits have displayed a similarly trajectory.

Management expects another year of “top line growth and margin expansion” in 2023, with sales up across all sectors. Since global peace seems unlikely to break out in the near future, there’s little reason to dispute that. The stock could easily grow another 50% next year. BAE shares would presumably take a knock if Russia and Ukraine entered peace negotiations, but sadly, it looks more likely that the war will drag on.

Geopolitical uncertainty is not the only reason BAE is doing so well. It has also been lifted by the weaker pound, which has boosted the value of its overseas earnings once converted back into sterling. That tailwind may soon ease, though. After former Chancellor Kwasi Kwarteng’s mini-Budget, there was talk of the pound falling to parity with the dollar. Now it’s above $1.22.

I’m targeting other FTSE 100 stocks

The outlook for the BAE Systems looks bright, so should I buy it? The stock would sit handsomely in my portfolio. It isn’t too expensive either.

There’s one thing stopping me. Right now, there are a whole heap of FTSE 100 companies that excite me more. Not because they’re better run, or have brighter prospects. Often, the reverse is true. I’m currently loading up on stocks that have a bad time of it in 2022, in the hope of hoovering them up at bargain prices (and with high yields).

Since I invest for a minimum 10 to 15 years, time is on my side. I can bag them at a low entry price, reinvest any dividends to purchase more stock, then sit back and wait for the recovery. That is my strategy today, and BAE doesn’t fit into it.

Which is a shame, because it’s a great company. Can’t buy ’em all, though.

The post The BAE share price is up 50% in a year! 2023 could be even better appeared first on The Twelfth Magpie.

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• Should investors consider buying BAE Systems shares now they’re back below £20?
• BAE shares are falling: opportunity or warning?

Harvey Jones holds shares in Lloyds Banking Group and Persimmon. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Navigating markets in 2022 has been far from easy. And as a retail investor, the untold amounts that have been wiped off global markets has made it difficult to know where to put my money. However, I’m staying positive. I think the current market presents plenty of opportunities to buy some shares and hold them for the long run. With this, I’m on the lookout for FTSE 100 stocks I can buy this month.

Here are two I’m considering.

BAE Systems

My first choice is the arms and security business BAE Systems (LSE: BA.). The stock has had a prosperous year, rising over 45% year to date. Over the last 12 months, it’s up an impressive 44%.

The main reason for the rise is the war in Ukraine. While the conflict will have a direct influence in generating business for BAE, it’s also driven defence concerns across the globe. With talks of a ‘new Cold War’, BAE has seen a higher demand for its products.  

The first six months of the year saw the firm’s underlying profits rise by 8.2%. However, what was arguably more significant was the order backlog of £52.7bn, an 18% rise from the same period in 2021.

The stock also offers a dividend yield of around 3.1%. While this isn’t FTSE 100 average beating, the business has looked to increase shareholders’ returns this year, including an increased interim dividend and a £1.5bn buyback programme. These are positive signs.

What could see the business struggle in the months ahead is the higher cost of materials as inflation continues to surge.

However, with a positive outlook for 2022 and beyond, BAE Systems shares look like good value to me.

GSK

The second stock I’m looking at is pharmaceutical giant GSK (LSE: GSK). The multinational healthcare business is best known for offering medicines and vaccines. The stock has fallen over 9% this year. In the last 12 months, it’s down 8%.

This week saw the firm release its Q3 results, where it reported continued strong growth. For the period, sales rose 9% to £7.8bn, including impressive 24% growth in its Speciality Medicines.

The business raised its guidance back in July. However, Q3 has seen it push up this guidance again, with it now expecting growth in sales to be between 8% to 10%.

This continuous growth follows the demerger of its consumer healthcare division, Haleon. The move has allowed GSK to streamline its operations and siphon off debt. And with CEO Emma Walmsley describing the move as undoing the “Gordion knot” that has hampered GSK’s balance sheet, the early signs are that the move is working.

What also draws me to GSK, like BAE, is its dividend yield. This currently sits at around 6.4%. With inflation reaching a fresh 40-year high for September, the passive income generated from this seems like a smart move.

GSK will also likely be impacted by higher costs as inflation continues on its charge. Yet despite this, I see long-term potential.

The verdict

I like both of these stocks. However, I won’t have the cash to buy both in November. I should have enough to buy one, so I’ll probably look to pick up GSK.

The post 2 FTSE 100 stocks I’d buy in November appeared first on The Twelfth Magpie.

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• Down 14% to around £19! Is now just the right time for me to capitalise on GSK’s bargain-basement share price?
• Should investors consider buying BAE Systems shares now they’re back below £20?

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended GSK plc and Haleon plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This is such a good time to go shopping for cheap dividend shares that I haven’t paid much attention to FTSE 100 growth stocks lately. So I was surprised to see how well BAE Systems (LSE: BA) has performed.

The defence manufacturer is up 34.52% in the past 12 months. That compares to a drop of 4.13% on the FTSE 100 as a whole over the same period.

BAE also outperformed over five years, growing 29.78%, while the index has fallen 7.95% over the same period. It’s thriving in tough times.

Beating the market

A quick glance at how the company describes itself explains why. “We design, manufacture, upgrade, and support combat vehicles and provide ammunition, precision munitions, artillery systems and missile launchers to a global customer base.”

Defence is arguably the number one defensive sector in our warlike times. Sadly, artillery, missiles and munitions are going to be in demand for some time. 

In August, BAE reported an 8.2% increase in half-yearly underlying earnings before interest and tax to £1.11bn, as its customers committed to increased defence spending. It also announced a £1.5bn share buyback.

Its earnings look set to rise even higher as the US, Europe and Asia boost defence spending to address what chief executive Charles Woodburn calls “the elevated threat environment”. JPMorgan Cazenove is now predicting around 10% earnings per share growth a year to 2025 and most likely beyond, with “quite low” risk. That’s impressive, given the harsh headwinds facing so many top UK companies at the moment.

BAE Systems also boasts a fully funded UK pension scheme, solid growth across all five divisions and a £52.7bn order pipeline. Free cash flow is solid and it pays out 50% of profits as dividends.

The FTSE 100 is packed with dividend stocks offering incredible yields, which make BAE Systems’ 3.3% forecast yield look modest by comparison. It’s nicely covered twice by earnings though.

Boom time for BAE

Perhaps the biggest surprise is that this £25bn company trades at a relatively inexpensive 14.8 times forward earnings. There are much cheaper stocks on the FTSE 100, of course. Some are available at five times earnings or less, but few enjoy as many tailwinds as BAE Systems.

As with any stock, there are risks (although unfortunately for the world, peace breaking out any time soon isn’t one of them). Servicing its £3.1bn net debt will get pricier as interest rates rise. Another danger is that markets may decide the BAE Systems share price has flown too high. If inflation falls and central bankers start easing, investors could make a tactical shift to recovery stocks.

I’m already there. While I think BAE Systems is arguably today’s best FTSE 100 growth stock, my current strategy is to buy dividend stocks as they’re available at rock bottom valuations right now. I prefer to buy stocks when they’re down, rather than when they’re up. So I might wait until BAE has fallen out of favour again. I accept that could take some years.

The post This might just be the best growth stock on the FTSE 100 appeared first on The Twelfth Magpie.

More reading

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• 1 FTSE stock tipped to handily outdo Rolls-Royce shares by 2027
• Forget SpaceX, here are 3 UK tech stocks to consider buying without the high price tag
• Should investors consider buying BAE Systems shares now they’re back below £20?
• BAE shares are falling: opportunity or warning?

Harvey Jones doesn't hold any of the shares mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

After what has been a difficult year, I’m on the lookout for FTSE 100 stocks that I can add to my portfolio and hold for the long run. The index has shown its resilience this year as its price has barely nudged. And when compared to the S&P 500, which is down over 10% in 2022, the top 100 UK companies by market capitalisation have shown their worth.

After analysing the index, here are two I have my eye on today.

Unilever

My first pick is consumer goods company Unilever (LSE: ULVR). The business owns over 400 household brands, including names such as Dove, Marmite, and Ben & Jerry’s. So far this year, the Unilever share price is down just over 1%.

My main attraction to the stock is that through buying it I’m adding a strong collection of brands to my portfolio. A third of the world uses its products on a day-to-day basis, highlighting their must-have status and therefore, to some extent, Unilever’s pricing power.

For the first half of the year, revenue grew 8.1% for the business. Yet despite this rise, volume fell by nearly 2%.

This was possibly due to the fact Unilever increased its prices by 9.8% for the period amid rising inflation. With growth being “driven by strong pricing to mitigate input cost inflation,” this shows the firm is capable of tackling surging costs.

On top of this, it’s also made headway in its €3bn two-year buyback scheme, with the aim of launching the second tranche of this in the third quarter.

What does concern me is its debt, and more specifically, rising interest rates on this debt. With the interest rate on average net debt rising from 1.4% last year to 1.9% this half, an already substantial pile has now become more difficult for Unilever to eradicate.

However, I’d still buy Unilever shares today. Its strong brand recognition allows it to fight back against pressures such as inflation. And with moves like buybacks, I’d buy today and hold for the long term.

BAE Systems

My second choice is the arms and security business BAE Systems (LSE: BA). In a year when many have suffered, the FTSE 100 stock has bucked the trend, rising 44% year to date.

The main catalyst for the rise has been the tragic war in Ukraine. While this war alone will drive business for the firm, more widely it’s sparked defence concerns among European countries. As such, BAE’s products have been in higher demand.

For the first half of the year, the company saw underlying profits grow by 8.2%. It also expects up to 4% growth in sales for 2022.

Within its latest update, CEO Charles Woodburn stated that BAE sees “further opportunities to enhance the medium- and long-term outlook as our customers commit to increased defence spending to address the elevated threat environment.”

Like Unilever, BAE is running a buyback programme of up to £1.5bn. With it also increasing interim dividends, these are positive signs for me.

The business may face supply chain pressures in the months ahead and with inflation rising this will more than likely push up the cost of materials.

However, with a strong long-term outlook, I’d happily buy today.

The post 2 FTSE 100 stocks I’d buy and hold! appeared first on The Twelfth Magpie.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The state pension age is now 66 for men and women, but from 2026 it will start rising to 67. Then it will rise again to 68, possibly from as early as 2037. It could ultimately climb past 70, to keep it affordable. I like my job but I’m not sure I want to work that long. Building a balanced portfolio of UK shares should mean I don’t have to.

I’ll decide when I retire, thank you

Anybody who believes the state will provide a decent standard of living in retirement is sadly deluded. It’s not going to happen. The UK already spends more than £100bn a year on the state pension, that’s an incredible 12% of total public spending and this proportion will rise as the population ages. Chancellor Rishi Sunak has already scrapped the triple lock once, and he is likely to do it again, in my view. So this is where UK shares come into it.

I’m self-employed, so it’s up to me to build retirement savings in my name. Nobody else is going to do it for me, sadly. I’m starting by building a balanced portfolio covering major markets such as the US and Europe, and sectors such as smaller companies. I don’t know enough about these markets to buy individual stocks, so I rely on low-cost exchange-traded funds (ETFs) and investment trusts to do the job for me. I do know a bit about UK shares, though.

There are three reason why I buy individual UK shares instead of funds.

• They give me the opportunity to generate outperformance and beat the market.
• Direct equities are more exciting because they can move rapidly (in either direction), and that keeps my interest levels high.
• It’s challenging (in a good way)! I like examining UK shares and checking out their potential, then seeing what happens to my stock picks (and how good/bad my judgement is).

Here’s why I’m buying UK shares

Right now, I can see plenty of opportunities out there. I suspect we are on the cusp of a commodity boom, because of that awful war in Ukraine. Rio Tinto tempts me. So does Anglo-American. I feel the financials sector is ready for a comeback, and rising base rates should allow the likes of Barclays and Lloyds Banking Group to widen their net interest margins and boost profits.

UK shares pay some of the most generous dividends in the world. Just look at Vodafone, GlaxoSmithKline, Johnson Matthey, and BAE Systems to name just a few. I will reinvest my shareholder payouts for growth today, and draw them as income when I finally retire. That may be when I’m 65, it may be later. The important thing is that the decision is down to me.

The post I still plan to retire at 65 and I’m banking on UK shares to get me there appeared first on The Twelfth Magpie.

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Harvey Jones doesn't hold any of the shares mentioned in this article. The Motley Fool UK has recommended Barclays, GlaxoSmithKline, Lloyds Banking Group, and Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As stock markets crashed this morning, there aren’t many places for investors to hide. One exception is FTSE 100 defence giant BAE Systems (LSE: BA). Somewhat predictably, its shares are firmly in positive territory. Regardless of what happens next in Eastern Europe, I think this remains a great stock to hold for the passive income it generates.

Results

Although unlikely to be the main catalyst for today’s rise in the share price (+5%, as I type), it’s worth touching on today’s unintentionally well-timed full-year results.

At £21.3bn, sales rose by 5% in 2021. Underlying earnings moved 13% higher to £2.21bn. Positively, the company also reduced its net debt pile down to £2.16bn from £2.72bn the year before. This is something I particularly like to see any company doing, even though I doubt this burden has caused investors any sleepless nights. 

On a statutory basis, revenue rose slightly to £19.5bn and operating profit jumped by almost 24% to £2.39bn. BAE’s order book decreased slightly to £35.5bn. 

As a whole, I see all this as a decent set of numbers from the FTSE 100 giant. Then again, I strongly suspect the share price would have moved higher today anyway. 

Dividend delight

Looking ahead, BAE said it expected total sales to grow between 2% to 4% in 2022. Encouragingly, roughly 75% of these are “already in the order backlog“.

Out of interest, its Maritime and Cyber & Intelligence divisions are likely to experience the biggest rise in sales. The latter comes as no surprise to me considering yesterday’s report from the Department for Digital, Culture, Media and Sport. It stated the UK cybersecurity sector achieved double-digit growth last year. As I’ve stated previously, I believe this will be one of the biggest investment themes of the next decade.

Importantly for income hunters, the FTSE 100 member said free cash flow in 2022 was now likely to be “in excess of £1bn“. That should mean that the dividend stream — BAE’s biggest attraction, in my opinion — should be just fine. 

Speaking of which, BAE announced a final dividend of 15.2p this morning. This brings the total cash return for FY21 to 25.1p per share. At the current share price, that equates to a trailing yield of 4%. Although nothing is guaranteed, analysts have the company hiking the dividend by another 5.5% this year.   

Safe haven?

The invasion of Ukraine by Russian forces is clearly worrying at a human level. Seen purely from an investment perspective however, there are certainly worse places to park my capital than BAE Systems. 

This is not to say the shares won’t experience some volatility in the weeks and months ahead. When times are tough, traders exit first and ask questions later. And right now, there’s no telling when this stock market crash will end. That’s hard to endure as an investor, even if it may lead to some great buying opportunities.

In addition to this, I should mention that the BAE share price is barely higher today compared to where it was five years ago. As well as going some way to justifying the stock’s relatively low valuation (12 times earnings), this also shows just how important those dividends are to the investment case. Without them, I’d be far less inclined to invest, as good as the aforementioned growth prospects for its cybersecurity arm are.  

The post As stock markets crash, here’s 1 FTSE 100 dividend stock to buy now appeared first on The Twelfth Magpie.

More reading

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• 1 FTSE stock tipped to handily outdo Rolls-Royce shares by 2027
• Forget SpaceX, here are 3 UK tech stocks to consider buying without the high price tag
• Should investors consider buying BAE Systems shares now they’re back below £20?
• BAE shares are falling: opportunity or warning?

Paul Summers owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

When it comes to selecting the best dividend stocks to buy in the FTSE 100, I’ve long been a fan of defence giant BAE Systems (LSE: BA). And based on today’s trading update, I don’t think there’s much chance of payouts drying up any time soon. 

In demand

This morning, the company reported that demand for its assorted combat vehicles, weapons and technologies “remains high” and that it continued to boast a robust order book and pipeline of opportunities. Importantly, BAE made no change to its guidance. Sales growth of between 3% and 5% is expected for the full year.

Interestingly, BAE commented that it had managed to avoid “any material impact” on its business from supply chain pressures. I reckon there are quite a few stocks in the FTSE 100 that would love to make such an announcement to shareholders.

Investors may also be encouraged by news that many of BAE’s customers, particularly the US, have made it clear that they plan to increase defence spending. Trading in the Asia Pacific region is also expected to “grow significantly”  and ongoing uncertainty in the Middle East should mean the renewal of existing contracts and other opportunities with clients already on BAE’s books. 

A FTSE 100-beating dividend yield

As good as all this sounds, my main incentive for buying BAE now would be for the aforementioned dividend stream. Today, the £18bn juggernaut confirmed that it would be making an interim payment of 9.9p per share this month. That’s a 5.3% rise on the same payout last year (9.4p). This hits on something I consider vital when selecting stocks for income.

For me, a long record of a business consistently raising its cash returns is preferable to one offering a sky-high yield. More often than not, the latter tends to be unsustainable. By contrast, BAE’s dividends should be healthily covered by profits. As a result, I can be more confident it will actually be paid. 

This is not to say that BAE’s yield is low. As things stand, analysts expect the firm to return a total of 24.6p per share for FY2021. At today’s price, that gives a yield of 4.3%. This is higher than the 3.4% or so I’d get from buying a basic FTSE 100 index tracker. It’s also far better than the woeful 0.67% I’d receive from even the best Cash ISA.

No sure thing

As positive as I am on BAE, it must be highlighted that these dividends are never guaranteed. I’d also need to ponder just how long the company can avoid being affected by global supply chain issues. I don’t see any resolution to this for a while. It’s also abundantly clear that we’re still not at the end of the pandemic just yet.

The longer-term performance of the share price also leaves a lot to be desired. BAE’s stock has climbed 30% over the last 12 months. Even so, it’s still 3% below where it stood five years ago. This is why I always need to consider what I might be giving up by not investing elsewhere in the FTSE 100.

As long as I remain sufficiently diversified and that income stream is maintained, I reckon this remains one of the best dividend stocks for me to buy in the index. Moreover, a valuation of 12 times earnings looks reasonable to me, given the encouraging outlook.

The post Here’s one of my top FTSE 100 dividend stocks to buy now appeared first on The Twelfth Magpie.

More reading

• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• 1 FTSE stock tipped to handily outdo Rolls-Royce shares by 2027
• Forget SpaceX, here are 3 UK tech stocks to consider buying without the high price tag
• Should investors consider buying BAE Systems shares now they’re back below £20?
• BAE shares are falling: opportunity or warning?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Bank of England has now warned that inflation could rise above 5% by the beginning of 2022. How, as a Foolish investor, can I respond?

One option would be to pay more attention to stocks that have a solid record of increasing dividends and thus helping to maintain (and potentially improve) my buying power. Fortunately, I think there are a number of stocks in the FTSE 100 that tick this box.

Consistent hiker

It may lack the excitement of your average, unprofitable tech stock, but Bunzl (LSE: BNZL) keeps raising its dividends year after year. Analysts expect the international distributor to return 56.1p to holders for FY21 — up around 3.7% from FY20. This would give a yield of 2.2% at the current share price.

Now, that’s admittedly a lot lower than some firms in the FTSE 100. However, my objective here is not to look for the largest yield, especially if it’s not moving higher. A big but stagnant dividend suggests a company is treading water. More often than not, this payout is eventually cut, or wiped completely.

By contrast, a consistently rising payout tends to be indicative of a well-managed, healthy business. When added to capital gains, this potentially makes Bunzl a better bet for reducing inflation risk.

One potential drawback however, is the relatively pedestrian performance of its share price. BNZL has climbed only 5% in value over the last 12 months. That’s not necessarily a deal-breaker, but it does make maintaining its dividend growth record vitally important.

Chunky dividends

A second FTSE 100 stock I’d be tempted to add to a passive income portfolio is insurance giant Legal & General (LSE: LGEN). Bar the odd exception (e.g. the anomaly that was 2020), L&G also has an excellent record of hiking its dividend.

Analysts are predicting the £17bn-cap will pay investors 18.4p per share in FY21. That’s a 4.6% increase from the previous year. It also gives a monster yield of 6.5% at today’s share price.

This is not to say that everything will be plain sailing. LGEN’s outlook is very much tied to the health of the wider economy. Back in March 2020, for example, the stock pretty much halved in value. This serves as a reminder that investing in even the most established FTSE 100 companies involves risk. 

Then again, it might be said that Legal’s price tag already gives investors a decent margin of safety. Right now, I can pick up the shares for a little less than nine times forecast earnings.

FTSE 100 core holding

A final top-tier company with a history of rewarding income seekers is BAE Systems (LSE: BA). The defence giant is in line to increase its total dividend by 3.6% in FY21, giving a yield of 4.2%.

As things stand, that won’t be enough to keep up with inflation on its own. However, it still looks hugely attractive when you’ve got Cash ISAs returning roughly one-tenth of this amount (and thus doing very little to stop the value of any deposit being eroded).

One thing all dividend hunters must accept, of course, is that increasing payouts can’t be assumed. Given that defence spending can be rather lumpy, that’s particularly worth remembering with BAE. 

Still, I’d say this is already accounted for in the valuation. Despite its share price rising 30% in the last year, BAE stock currently trades on just under 13 times predicted earnings.

The post 3 FTSE 100 dividend hikers to buy as inflation bites appeared first on The Twelfth Magpie.

More reading

• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• Up 27.1% in 6 months: a FTSE 100 share paying out 2.8% a year!
• Here’s why I bought this 7.6%-yielding FTSE 100 dividend stock instead of saving in a Cash ISA
• How do the government’s latest changes affect your Stocks and Shares ISA?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In sharp contrast, although it’s never guaranteed, the stock market is about as close as I think anyone can get to earning money for very little output beyond taking a few simple steps. So how do I do this?

1. Cut back (regularly)

I reckon many people don’t get started with investing because they assume they need a lot of cash to do so. However, the truth is I can crack on with relatively little seed money.

Today, I’m using £25 per week as an example. Of course, the actual amount will vary from person to person and depend on a whole host of factors. However, I think that’s achievable for a lot of people. Yes, it could mean one less takeaway a week or skipping the daily coffee shop trip and making a brew at home. Notwithstanding this, knowing such sacrifices can genuinely lead to me earning money while I sleep more than makes up for it.

Getting into the habit of putting £25 aside every week will give me £1,300 every year to invest. Over 10 years, that becomes £13,000 in savings. At this point, such a pot of cash could deliver hundreds of pounds in passive income on an annual basis. That might pay for a family holiday or similar treat. Naturally, a far higher sum could conceivably be achieved if the weekly saving amount were £50, £100 or even more.

2. Open a Stocks and Shares ISA

Of all the five steps mentioned today, this one is right up there in terms of importance. If I’m looking to build a passive income stream, it makes absolute sense to do so using a Stocks and Shares ISA. There are two reasons for this: 

1. I won’t pay any tax on any passive income I receive
2. There are no restrictions on me withdrawing this money

Contrast this with a Lifetime ISA or SIPP (Self-Invested Personal Pension). While both of these accounts offer tax benefits, holders are heavily penalised if they try to withdraw any cash before they reach a certain age. A traditional ISA is far more flexible and allows for income to be spent if so desired.

3. Buy the best passive income stocks

The next step is choosing stocks to buy. Since the goal is to produce passive income, companies paying dividends should be prioritised here. Dividends are simply a proportion of the profits a business makes that are returned twice a year (or sometimes every quarter) to loyal holders.

Unfortunately, not all dividend stocks are created equal. The best are those that offer a decent but not excessive payout that’s consistently hiked, usually every year. Examples from the UK stock market that I’d pick out include defence giant BAE Systems and insurance firm Legal & General. 

If a dividend yield looks too good to be true, it probably means the market doesn’t expect it to be paid. As a rough rule of thumb, anything over 6% usually pushes me to do some extra research. A very high yield may be due to a company’s share price falling heavily, perhaps due to a slowdown in trading. In such a situation, I’d need to be confident of things recovering. If they don’t, that chunky dividend may be slashed or axed.

Of course, nothing in investing is guaranteed anyway so it makes sense to buy a selection of income stocks rather than just one or two. 

3. Keep costs low

An alternative to the above is to buy what’s known as an exchange-traded fund. This tracks the returns of an index — a big group of shares. An example would be the iShares Core FTSE 100. Not only does this spread my money around lots of very different companies, it also pays a respectable (and so far reliable) dividend.

Another option would be to hand my cash over to a professional fund manager who specialises in picking income stocks. The only problem here is that they often charge hefty fees.

Regardless of which approach I use, buying dividend-paying shares or funds frequently usually isn’t very cost-effective. Picking up shares of the aforementioned BAE Systems, for example, would cost me roughly £10 each time in commission. That’s 40% of my weekly savings! 

With this in mind, I’d take full advantage of any ‘regular investment’ schemes offered by my Stocks and Shares ISA provider. As it sounds, this allows me to invest every month, usually at a far lower cost than that mentioned above (maybe around £1, but with some providers it’s free). As experienced investors will know, limiting costs is one of only a few things within our control. However, it can make a huge difference to our eventual returns. The less money I spend here, the more I can put to use buying assets that eventually pay me.

Investing regularly but cheaply also avoids the temptation of trying to ‘time’ the market. Buying a stock for a lot less than it’s worth during a market crash is plainly great. That said, it’s not the most important thing for a passive income seeker. Moreover, it’s very hard to do in practice when everyone is panicking.

5. Do nothing

Aside from buying reliable dividend stocks (or a fund or two), there’s very little I need to do to lock in true passive income. In fact, investing is one of the few things in life where doing nothing can often lead to better rewards.

The key thing for me to remember here is that a lot of firms offering financial services depend greatly on effective, persuasive marketing. I’m encouraged to act because it generates fees, even if that action might not be to my benefit. In reality, there’s simply no need to watch my portfolio rise and fall and rise in value. After all, the whole point of investing for passive income is to make money while using my time more productively.

One final point. In this article, I’ve talked about passive income with the view to spending it. However, if that income isn’t needed to pay the bills and the odd treat, it’s a great idea to reinvest it back into the market and benefit more from compounding — the secret sauce for fantastic long-term returns from the stock market. That’s the Foolish way.

The post 5 steps to passive income for £25 a week appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.